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Marshall School of Business
University of Southern California
University of Southern California:
Responsibility Center Management System
Teaching Note
Purpose of Case
This case was developed to illustrate some of the issues involved with the design and use of
management control systems within a prominent form of not-for-profit organization. A
university provides a good illustration for teaching purposes because students are familiar with
the setting. The students know, intuitively, that a universitys organizational goals and the
methods of both generating revenues and allocating the available resources are different from
Suggested Assignment Questions
1. Using the financial responsibility center terminology that we use in this course, what would
you call USCs responsibility centers? Are they revenue centers? Profit centers? Something
else?
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2. The RCMS seems to be working reasonably well. USC has used it for over 25 years, and
seemingly nobody wants to abandon it. What makes it effective?
3. Consider each of the criticisms of RCMS:
a. Does it sound plausible that the RCMS could have been causing, or at least contributing
to, the problem if, indeed, there was a problem?
Case Analysis
I like to begin the case discussion with the big picture, clarifying what is different about
managing at USC vs. a for-profit firm. Students make points like the following:
Goal complexity. Many constituencies. The goals often conflict.
Primary goal is not to make a profit, or maximize shareholder wealth. It is to educate
students and create knowledge. The finances are just a constraint.
USCs strategies are designed to build on its competitive advantages, such as its urban location,
its location on the Pacific Rim, and its large alumni base. This is not greatly different from a for-
profit organization.
Then, to make the discussion more tangible, I have the students assemble a list of Key
Recurring Decisions (KRDs) and think about who in the organization makes these decisions.
They will assemble a list something like the following:
Course offerings: What programs/courses to offer?
Faculty and staff recruiting: Who to hire?
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
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Facilities: How should facilities be designed and used efficiently?
Admissions: What students to admit, and how many to admit?
Scholarships: Whom to give financial aid to?
Pedagogy: How large should class sizes be?
Resource usage: How to allocate resources across:
Facilities
It is not necessary to get a complete list. What is important is to recognize that most of these
decisions are made within the academic Schools, so the decision-making authority is vested in
the deans.
The next question to consider is how USC ensures that these decisions are made well. The
primary answer is the RCMS. I find it useful to clarify the major elements of the RCMS, to
make sure all students understand them. These elements include:
Decentralization of authority to responsibility centers
Revenue centers keep most of the revenue they generate
Question 1
USC has two types of responsibility centersrevenue centers and administrative centers. What
USC calls revenue centers are really profit centers because the managers of those centers make
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Question 2
The bulk of the case describes the principles on which the RCMS system was designed and the
reasons for the various system details. It is not necessary to restate all that in this teaching note.
The proper overall conclusion is that the USC system works. USC administrators are not taking
Question 3
(4) encouragement of inappropriate courses; (5) encouragement of end-of-period financial
gameplaying; and (6) inaccurate cost allocations. I have the students discuss each of these to
make sure they understand the criticisms, and then I want them to consider answers to the
following questions:
Are these problems real or imaginary?
Are these problems important or not?
Are these problems caused or made worse by RCMS system, or is RCMS merely being
blamed for not fixing the problems?
Then it is useful to consider each of the modifications of the RCMS over the years: (A)
centralization of general education (GE) courses; (B) centralization of doctoral program
Question 4
As students see that not all of the criticisms have been addressed, they will have various
suggestions to improve the system.
Another way to critique the system is to reconsider the original nine management principles.
Are they appropriate, and have they been faithfully and effective applied?
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
496
Some instructors find it useful throughout the discussion to steer the students into looking at
these issues from various perspectives (i.e., a faculty member, a dean, the central administration,
In the end, I think the correct conclusion is that the RCMS system is working well. USC
administrators are constantly critiquing the system and modifying it. But the modifications are
relatively minor. There are no efforts underway to abandon the RCMS system, to return to the
days of highly centralized management. USC appears to be performing well: The university is
growing; it is fiscally strong; and it is rising rapidly in many important rankings. Certainly the
RCMS can be improved further, but no system will ever be perfect.
It is interesting to note toward the end of class that very few colleges and universities use a
Pedagogy
Encouraging student participation when using this case is not difficult. Seemingly, every student
has ideas about how a university should be managed. There are lots of issues in the case. The
main challenge for instructors is to determine what issues to focus on and how to allocate time
across them.
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
497
Figure TN-1
Criticisms of RCMS over
the years
RCMS refinements over
the years
2. Discouragement of multi-
disciplinary research
4. Encouragement of
5. Encouragement of end-of-
period financial game playing
B. Centralization of doctoral
program finances
D. Reducing (and then
E. Modify cost allocations
